Property Tax Primer

Our practice focuses on estate planning, but because estate planning deals with finance, property, taxes, and a host of other complex concepts we also have knowledge and experience with those areas, which allows us to better assist our clients. As attorneys we are frequently called upon to explain things to our clients that fall outside the strict boundaries of the law. Recently a client called me with question that a bit of informal research indicates a lot of people need help answering. That question, "What does the Notice of Assessment, Taxable Valuation, and Property Classification, that IS NOT A TAX BILL, tell me?"

Understanding about their property tax liability is not simple. Many homeowners pay their property taxes via an escrow account connected to their mortgage and therefore the only time they think about property taxes is when a local election includes a millage resolution. In many cases, homeowners do not understand exactly how a millage will affect their property tax liability, except to know that it is likely to increase their property tax bill. 

Local municipalities, such as villages, cities, and townships, assess property taxes based upon the value of real estate. The “millage” is the rate of tax on real property and municipalities calculate that liability by dividing the value of the property by $1,000 and multiplying that number by the millage rate. This means that a piece of property valued at $200,000 subject to a millage rate of 30 will have a property tax liability of $6,000. On a tax bill, millage rates are broken out by what they fund, including schools, public safety, and other services provided by the municipality. Winter and Summer rates vary because municipalities collect millages for different services at different times of the year.

Since the municipality calculates property tax liability based on the value of property it is also important to understand how the municipality calculates that value. This is where the Notice of Assessment, Taxable Valuation, and Property Classification (the “Notice”) becomes relevant. The Notice is how the municipality informs the property owner of the taxable value of their property. The Notice also contains other information about the value of the property in addition to the taxable value and this information frequently surprises and confuses homeowners.

In addition to documenting whether a variety of property taxes exemptions exist for the property, the Notice includes a table showing the following information:

	2017	2018	Change
1. Taxable Value	256,639	594,700	338,061
2. Assessed Value	598,300	594,700	-3,600
3. Tentative Equalization Factor: 1.0000
4. State Equalized Value	598,300	594,700	-3,600
5. There WAS or WAS NOT a transfer of ownership on this property in 2017: WAS

Taxable Value is the value the municipality uses to calculate the property tax liability, depending on circumstances Taxable Value may change dramatically from one year to the next.

Assessed Value is the value of the property as determined by the Tax Assessor, the Assessed Value of the property is frequently different than the Taxable Value.
The Equalization Factor is part of a calculation that helps to ensure uniform property assessment across the state.
The State Equalized Value is the result of multiplying the Assessed Value times the Equalization Factor.
Knowing whether ownership of the property was or was not transferred in the prior year is relevant to understanding changes in values from one year to the next.

The municipality's Tax Assessor determines the Assessed Value of the property and the process used by the Assessor to make this determination is beyond the scope of this blog but in general, the Assessed Value for a property should be approximately half of the fair market value of the property. The Taxable Value for property differs from the Assessed Value due to legislation capping the amount the Taxable Value of property may increase from year to year as long as the same owner owns it. Thus if the property values in a particular area dramatically increase over time, the taxable value of a given property will not increase proportionately. However when ownership of a property is transferred (with certain exceptions) the limitation on allowable increase in Taxable Value goes away and the Taxable Value “uncaps” increasing to the Assessed Value of the property. In the example above, the transfer of ownership in 2017 allowed the 2018 Taxable Value to increase substantially.
The system is imperfect and it is possible to challenge the Tax Assessor’s valuation of the property, but doing so requires the homeowner to produce evidence substantiating their claim, it is not sufficient to simply request that the Assessor change their original Assessment. Under many circumstances, it is necessary to go beyond the local Assessor to a Tax Tribunal in order to receive significant changes in the valuation created by complex circumstances.

I hope that this information allows you to better understand a complex document or at least remind you that your attorney can be of assistance regarding a variety of subjects. As we remind our clients, taking the time to speak with an attorney can help address a problem the right way the first time, as opposed to calling an attorney after trying to handle a problem on your own and then needing assistance to correct mistakes. Much like calling a plumber under similar circumstances, it is likely to cost more for the attorney to correct a problem than it would have cost to get proper guidance in the first place.

Passing on Vacation Homes and Cottages

     As the temperature slowly inches upward, indicating the actual arrival of Spring, it is a good time to discuss vacation homes and cottages. These properties are common in Michigan and frequently represent a substantial portion of an estate's assets. With the substantial increase in property values over the past 30 years, long-held vacation properties purchased decades ago now likely have substantial resale value. 

      We posted previously about keeping a vacation home in the family. For those who wish to see a family vacation property enjoyed by future generations there are concerns about the best way to structure such a transfer. Clients need to balance their desire to make a well-intentioned gift that has provided so many positive memories with the possible unintended burden on beneficiaries that may cause strife among loved ones. Additionally the transfer of such high-value assets brings with it potential estate and gift tax implications. While the current estate tax exemption creates a situation where risk of potential tax liability is very low, few people wish to use up any more of that exemption than necessary. Therefore, strategies that take advantage of the annual gift exclusion and allow for transfer of the vacation home over time rather than at death remain popular. 

      One result of a current real property transfer is the possible increase of property taxes for a new owner because the value of the property for determining property taxes may increase following the transfer. Michigan law places limits on the amount that the appraised value of a piece of property may increase for the purposes of calculating property tax liability while an owner continues to own property. The county, however, reassesses the value of the property when the property is transferred to a new owner. This reassessment is commonly known as "property tax uncapping." Certain transfers of property, such as between husband and wife or to the current owners’ living trust, are exempt and do not cause the property to uncap. In addition, as long as a husband and wife own more than 50% of the property, there will be no property tax uncapping. 

      Until recently, the list of exempt transfers did not include the complete transfer of property between parents and their children. While clients could reap potential benefits by transferring real estate during their lifetime (and avoid estate tax at death), the consequences in terms of increased property taxes outweighed the benefits of the transfer. Late in 2012, the Michigan legislature approved a change to the list of exempt transfers that goes into effect on December 31, 2013. Starting on that date, transfers to a first generation blood relative, that is from an individual to their children or to their parents, does not cause the property to uncap for the purpose of determining property tax liability. This new rule allows the transfer of a greater portion of the property to other family members without increasing property taxes. 

     This change creates the opportunity for clients to transfer vacation property to their children, whether via gift or through direct sale, without exposing their children to substantially higher property taxes. Any clients considering transferring vacation homes should wait until the end of the year to do so. As with any other tax or gift planning strategy is important to understand each client individual circumstances and consult with their professionals to ensure that the planning will not have unforeseen consequences.

Matt Ferrara